US Economy Inching Ahead, Despite Euro Recession

A deep recession in the euro zone is unlikely to hinder a U.S. recovery in 2013, according to Capital Economics economist Andrew Kenningham.

The U.S. economy has recently shown a few positive signals, with the unemployment rate falling to 7.8 percent, retail sales picking up and new home sales surging to a four-year high.

Reports released Thursday showed orders for long-lasting goods recorded its biggest gain in more than a year and a half in September, while jobless claims fell last week.

Initial jobless claims, a rough gauge of whether layoffs are rising or falling, decreased by 23,000 to 369,000 in the week ended Saturday from a revised 392,000 in the prior period, the Labor Department reported Thursday. The drop comes after weeks of big swings in the figures caused by difficulties in adjusting the data for seasonal variations.

The four-week moving average of first-time jobless claims, which flattens out week-to-week volatility and gives a more accurate picture of labor-market trends, showed that the number of Americans applying for unemployment insurance has fallen sharply since summer. Although the gauge rose 1,500 last week to 368,000, it was still below mid-June’s level of more than 387,000 claims and the 375,500 recorded at the end of September. That is a sign that employers are laying off fewer workers and the job market could be healing.

The Labor Department’s October employment report will be released Nov. 2, four days before Election Day. Economists are looking for a 125,000 rise in headline payrolls, a 130,000 increase in private payrolls and an unchanged unemployment rate of 7.8 percent.

A separate report on Thursday showed pending sales of existing homes increased 0.3 percent in September from a month earlier to a reading of 99.5. While that was short of economists’ expectations for a 0.7 percent gain, it still stands 14.5 percent above the year-ago levels, and the three-month average is the second-highest recorded level since government stimulus propelled housing activity higher in 2010.

“The broad trend in pending home sales mirrors that of the broader housing market and is, yet again, another indicator suggesting that the recovery in housing has broadened and has sustained momentum,” Michael Gapen, an economist with Barclays Capital, wrote in a note to clients.

Yet, it’s too early to sound the all-clear as the details behind the headline painted a soft picture.

Durable goods orders, which also came out on Thursday, retraced some of the lost ground in September, with a headline increase of 9.9 percent. While that represents the largest monthly increase since January 2010, the details of this report take most of the shine off the apple. The headline surge was mostly due to a 2640 percent month-on-month rebound in commercial aircraft orders.

When defense spending and aircraft orders are taken out of the report, we are left with an increase in capital goods orders of just 0.2 percent in August and no change in orders for September.

Shipments of core capital goods, a number used to help calculate quarterly gross domestic product, dipped 0.3 percent last month. That category fell in all three months of the third quarter.

That is not to say that there are no pockets of strength. Machinery orders and primary metals orders both increased in September, but, in both instances, the gains were set up by declines in these categories in August. Other sectors revealed weakness in various durable goods categories.

Orders for vehicles and parts, fabricated metals as well as computers and electronics all posted declines for the second consecutive month. Electrical equipment, which had increased 2.8 percent in August following back-to-back declines in the prior two months, gave back most of the August bump, falling 2.7 percent in the September report.

Decoupling From Europe

There's growing evidence to suggest that the U.S. and euro zone economies have "decoupled," meaning that no matter what happens in Greece, Spain and the rest of the beleaguered European nations, the U.S. economy wouldn’t be linked to those woes and would continue its mild recovery.

"We expect the euro zone to experience a deep recession next year but the U.S. to grow steadily,” Kenningham said. Capital Economics is looking for GDP to rise 2 percent in 2013 in the U.S. while falling 2.5 percent in the 17-nation euro zone.

Over the past two decades, the U.S. and European economies have generally moved together, because they have usually been driven by common global forces, such as an oil price shock, asset price bubble or coordinated interest rate movements. In this case, though, Europe is facing a “region-specific shock” that hasn’t hit the U.S., Kenningham notes.

Kenningham’s bottom line: “We doubt that even a deep recession in Europe would be sufficient to snuff out the U.S. recovery completely.”